Qualitative characteristics = TECHNICAL KNOWLEDGE To identify the qualitative characteristics of accounti : information. To identify the fundamental qualitative characteristics. identify the enhancing qualitative characteristics. nderstand the cost constraint on. useful informatioUnder the Conceptual Framework for Financial Reporting, qualitative characteristics are classified into fundamental _ qualitative characteristics and enhancing qualitative characteristics. Fundamental qualitative characteristics The fundamental qualitative characteristics relate to the content or substance of financial information. The fundamental qualitative characteristics are relevance and faithful representation. Information must be both relevant and faithfully represented if it is to be useful. Neither a faithful representation of an irrelevant phenomenon nor an unfaithful representation of a relevant Phenomenon helps users make good decisions. Application of qualitative characteristics The most efficient and effective Lyi nt al process of applying the fundamental qualitative characteristics would cau ae tify an economic phenomenon or transacti : Potential to be useful. maenot bear on an economic decision t be relevant to the decision — ial position is he statement of financi i 1s tee ee ancial position, and the income eis relevant in determining performance. : i ¢ share i ‘tion is more re specifically, the earnings per share information Pa ten ie value per share in determining the ctiveness of an investment. edients of relevance cial information is capable of n ; ion if it has predictive value and confirmatory value. ancial information has predictive value if it can be used n input to processes employed by users to predict future crame,' words, financial information has predictive value san help users increase the likelihood of correctly oF dicting or forecasting outcome of.events. ah soe ag and pi predicting di entity to 55 ae lityOften » ' ‘The predictive and confirmatory roles of information are interrelated. 7 ‘An example is an interim income statement which provides feedback about income to date and serves as a basis for predicting the annual income. The interim income statement for tke first quarter shows net income of P2,000,000. This information is the confirmatory value. If this trend continues for the entire year, it is logical to assume that the net income after four quarters or one year _would be P8,000,000. This information is the predictive value. Materiality Materiality is a practical rule in accounting which dictates that strict adherence to GAAP is not required when the items are not significant enough to affect the evaluation, decision and fairness of the financial statements. The, materiality concept is also known as the doctrine of convenience. _ Materiality is really a quantitative threshold linked very closely to the qualitative characteristic of relevance.item is material or not. Very often, this is dependent on good judgment, professiona expertise and common sense. As a general guide, an item is material if knowledge of it could reasonably affect or influence the econ Primary users of the financial stateme! omic decision of the New definition of materiality The IASB provided the following new definition of § materiality. Information is material if omitting, misstating or. obscuring tt — could reasonably be expected to influence the economic decisions that primary users of general purpose financial ‘ Statements make on the basis of those statements which provit fir al information about a Specific reporting entity. words, an information is material if the o1 ent and obscuring i i’ ied that only primary users of eS ees because these groups are i i tities to rimary users cannot require reporting en! de tnforimetion directly to them and therefore must rely 0 ‘general purpose financial reports for how much financial ormation is needed. The other users include the employees, customers, “government agencies and the public in general. Factors of materiality Materiality depends on the magnitude and nature of the financial information, In the exercise of judgment in determining materiality, the lative size and nature of an item are considered. size of the item in rel ch the item belongs is lation to'the total of the group to taken into account. expenses, the amount of Prepaid expenses to assets and the amount of ieee total property, plant and equipment. : ay be inherently material because bya nful representation means that the ansactions shall be properly accounted for 2 ted in the financial statements. erie, if the-entity reports purchases of P5,000,000 the actual amount is P8,000,000, the information would not be faithfully represented. To record a sale of merchandise as:miscellaneous income would not also be a faithful representation of the sale transaction. Ingredients of faithful representation To be a perfectly faithful representation, a depiction should | have three characteristics, namely: a, Completeness b. Neutrality ¢. Free from error Completeness Completeness requires that relevant information should be e ed in a way that facilitates understanding and avoids eous implication, mplete depiction includes all information necessary for to:understand the phenomenon or transaction being. including all necessary description and ex plete, the financial statemenyuld reasonably be e , new definition, material information econbmic decision of primary users rai eover, the could reasonably be expected to influence ‘threshold insures that information capable. of influencing economic decision of the primary users shall be included in the financial statements. Obscuring information Obscuring information is a new concept added to the new definition of materiality. Information is obscured if presenting or communicating it would have a similar effect as omitting or misstating the information. Obscuring information means the presentation of financial information not readily understood or not clearly expressed. bscuring information may be characterized by deliberate ambiguity and abstruseness. of obscured material information are: > is vague or unclear,tant shail disclose a material fact known to him is not disclosed in the financial statements but closure of which is. necessary in order that the financial ements would not be misleading. The standard of adequate disclosure is best described by disclosure of any financial facts significant enough to influence the judgment of informed users. Neutrality A neutral depiction is without bias in the preparation or Presentation of financial inforniation. A neutral depiction ‘is not slanted, weighted, emphasized, de-emphasized or otherwise manipulated to increase the ee tity that financial information will be received favorably or unfavorably by users. n other words, to be neutral, the information contained in cial statements must be free from bias, information should not favor one party to the another party. ‘ a) asm is synonymous with prudence. servatism means that when alternatives exist, the ive which has the least effect on equity should be chosen. Tn the simplest words, conservatism means "in case of doubt, record any loss and do not record any gain." For example, if there is a choice between two acceptable asset ; values, the ower figure is selected. Accordingly, inventories are measured at the lower of cost and net realizable value. Contingent loss is recognized as a "provision" if the loss is probable and the amount can be reliably measured. Contingent gain is not recognized but disclosed only. It is to bé emphasized that conservatism is not a license to deliberately understate net. income and net assets. For example, if an entity has a cash of P500,000 and reports | only P100,000, this is not conservatism but fraud or inaccurate re] ng. sions of conservatismt mean perfectly 0 free from error does no in all respects. example, an estimate of an unobservable price or value not be determined to be accurate or inaccurate. _ However, a representation of that estimate can be faithful if the amount is described clearly and accurately as an estimate. _ Moreover, the nature and limitations of the estimating process are explained, and no errors have been made in selecting and applying an appropriate process for developing the estimate. Measurement uncertainty . Beene uncertainty arises when monetary amounts in _ financial reports cannot be observed directly a f 0 nd must __ instead be estimated. i asurement uncertainty can affect faithful representation level of uncertainty in providing an estimate is high. er, the use of reasonable estimate i is f rea 7 is an essential ing financial information and does not onic 8 of the financial information. Factnd faithfully represented financial information is: ¢ the information would be most useful if it is able, understandable, verifiable and timely. _ Comparability Comparability means the ability to bring together for the Purpose of noting points of likeness and differerice. Comparability is the enhancing qualitative characteristic that enables users to identify and understand similarities and dissimilarities among items. Comparability may be made within an entity or between and across entities. Comparability within. an entity is the quality of information that allows comparisons within a single entity through time ‘or from one accounting period to the next. Comparability within an entity is also known, i oii i as ho) comparability or mtracomparability. ns barability between and across entities ig the i ra i uality of tion that allows comparisons between tet or BRE 8 engaged in the same industry. cross entities is also known as or dimensional comparability, == iy. FEsubstance of transactions and sized when economic substance differs ‘from tance over form is not. considered a separate component. ithful representation because it would be redundant. Faithful representation inherently represents the substance of an economic phenomenon.or transaction rather than merely representing the legal form. Representing a legal form that differs from the economic substance of the underlying economic phenomenon or transaction could not result in a faithful representation. Example of substance over form An example is when the lessee leased property from the lessor. The terms of the lease provide that the lease transfers ownership of the asset to the lessee by the end of the lease term, In form, the contract is a lease as popularly understood. n substance, in reality, if the "transfer of ownership n" is to be considered, the real intent of the partiesaparability is the goal and consistency helps to achieve goal. Tn a limited sense, consistency is the uniform application of accounting method from périod to period within an entity. On the other hand, comparability is the uniform application of accounting method between and across entities in the same industry. An entity cannot use the FIFO method of inventory valuation an one year, the average method method in the next year, again the FIFO method in succeeding year and so on. _ If the FIFO method is adopted in one year, such method is followed from year to year. Consistency. is desirable and ssential to achieve comparability of financial statements. ever, consistency does not mean that no change in iting method can be made. would result to more useful and meaningful such ghange shall be made. | Lypresenting ‘informa i : and 1 cisely" ee jt understandable. Rs tion provided in financial rstandable. by. users. 1 quality of the informa’ nts is that it is readily unde’ But the complex economic activities make it impossible to reduce the financial information to the simplest terms. Accordingly, the users shall have an understanding of the complex economic activities, the financial accounting process and the terminology in the financial statements. Financial statements cannot realistically be understandable to everyone. Financial reports are prepared for u. ; ° e sers who have a reasonable knowledge of business and economic activities and Who review and analyze the information diligently. times, even well-informed and. dili, er ‘ Q igent the aid of an adviser to unders zi phenomena or transactions users may need to tand information ‘aboutfinancia Fetirmation i is verifiable in the sense that it is rted by evidence so that an accountant that would look to the same evidence would arrive at the same economic cision or conclusion. Verifiable financial information provides results that would be substantially duplicated by measurers using the same Measurement method. Accordingly, verifiability helps assure users that information represents the economic phenomenon or transaction it purports to represent. Verifiability is synonymous with objectivity. Types of verification Verification can be direct or indirect. Direct verification means verifying an amount or other representation through direct observation, for example, by counting cash. verification means checking the inputs to a model, aor other Eechmique and recalculating the inputs usingr, some information may continue to. be timely long 3x the end of reporting period because some users may need to identify and assess trends. Timeliness enhances the truism that without knowledge of the ‘past, the basis for prediction will usually be lacking and without interest in the future, knowledge of the past is sterile. What happened in. the past would become the basis of what would happen in the future. Cost constraint on useful information Cost is a pervasive. constraint on the information that can be provided by financial reporting. Reporting financial information imposes cost and it is important that such cost is justified by the benefit derived from the financial information. In other words, the cost constraint is a consideration of the cost incurred in generating financial information against the benefit to be obtained from having the inform: The benefit derived from the information should exceed the ved in-obtaining the information. valuation of the cost constraint is s ation.the most efficient and effective DYOeeReh of the fundamental qualitative characteristics. en relevance. ( What are the two ingredients of relevance? 77. Explain predictive value. , 8. Explain confirmatory value. 9. When is an item material? 10. Explain the new definition of materiality. 11, What are the factors that may be considered in determining materiality? Explain the fundamental. qualitative characteristic of faithful representation. a are the three ingredients of faithful representation? completeness of financial information.istics? are enhancing qualitative characteristics : Enumerate the four enhancing qualitative characteristics, : 25. Explain comparability. 26. Explain comparability within a single entity. 27. Explain comparability between and across entities. 28. Explain consistency. _ 29. Distinguish consistency from comparability. 30. Explain understandability.titative characteristics of financial information ments of financial statements . Objectives of financial reporting 2. Qualitative characteristics a. Are considered either fundamental or enhancing. : b. Contribute to the decision-usefulness of financial reporting information. ¢. Distinguish better information from inferior information for decision-making purposes. d. All of the choices are correct. 8. The fundamental qualitative characteristics are a. Relevance and faithful representation b. Relevance, faithful representation and materiality ¢. Relevance and reliability d. Faithful representation and materiality 4. Accounting information is considered relevant when it a. Can be depended on to represent the economic conditions and events that it is intended to. represent. b. Is capable of making a difference in a decision. c. Is understandable by reasonably informed users of accounting information. ¢ cS verifiable and neutral.e On the economic decisions of users. “Inclusion of a degree of caution Freedom from material error mprehensibility to users 8. To achieve faithful representation, the financial statements Must have predictive and confirmatory value. . Must be completé, neutral and reasonably free from error. . Are understandable, comparable, verifiable and timely. - Must possess all of these. 9. The financial accounting information is directed toward the common en of users and is independent of presumptions about particular needs a i pee zeetions nd desires ofal information exhibits consistency when Accounting procedures are adopted which smooth net income and make results consistent between years. b. Gains and losses are shown separately on the income statement. ec. Accounting entities give similar events the same accounting treatment. each period. . Expenditures are reported as expenses. 8. When information about two different entities engaged in the same industry has been prepared and presented in similar manner, the information exhibits the enhancing qualitative characteristic of a. Relevance b. Faithful representation c. Consistency -d. Comparability The characteristic that is demonstrated when a high " degree of consensus can be secured among independent _ Mieasurers using the same measurement metae is a. Relevance ‘Understandability se lityi to estimate rather than physically count at interim periods is an example of a tradeoff a. Verifiability and comparability b. Timeliness and comparability ec. Timeliness and verifiability d. Neutrality and consistency 8. Which qualitative characteristic of financial information requires that information should not be biased in favor of dne group of users to the detriment of others? a. Relevance b. Free from error c. Completeness d. Neutrality . For information to be useful, the linkage between the users and the decisions made is a. Relevance b. Faithful representation ©. Understandability Verifiability ch statement is true in relati i 4 Bie? relation to the enhancing sonable know! of busi jih of the following terms best describes information : that influences the economic decisions of users? a. Reliable b. Prospective ¢. Relevant d, Understandable 8. What is the quality of information that enables users to better forecast future operations? a. Faithful representation b. Materiality c. Comparability d. Relevance 4. According to the Conceptual Framework, predictive value and confirmatory value are ingredients of _ a. Relevance _ b. Faithful representation “sy UnderstandabilityInformation is measured and reported in a similar fashion across points in time. b. Information is timely. Information is measured similarly across the industry. d. Information is verifiable. 8. Which of the following is not an enhancing qualitative > _ characteristic? . Understandability . Profit-oriented . Timeliness . Comparability , Changing the method of inventory valuation should be reported in the financial statements under what enhancing quality of accounting information? @. Understandability . Verifiability imeliness Comparability entity applies the same accounting treatment from period to period, ite entity isab Pe e qualitative characteristic of faithful representation a. Predictive value b. Neutrality ¢. Confirmatory: value d. Timeliness 8. Enhancing qualitative characteristics of accounting information include all of the following, except a. Timeliness b. Materiality c. Comparability d. Verifiability 4. The enhancing quality of understandability means that information should be understood by a. Those who are experts in the interpretation of financial information b. Those who have a reasonable understanding of business and economic activities ¢. Financial analysts d CPAs qualitative characteristics of include “2the conceptual framework, verifiability. Legal evidence . Logic __¢. Consensus d. Legal verdict . When an entity has started placing its quarterly financial statements on its web page, thereby reducing by ten days ‘the time to get information to investors and creditors, the qualitative concept involved is Comparability Consistency Timeliness Faithful representation Boop When an entity changed the inventory valuation method, which characteristic is jeopardized by this change? Comparability Representational faithfulnessa is material if ‘omission influence the judgment of a prim: ser. of these statements are true about materiality. 2. An item would be considered material when The expected benefit exceeds the additional cost. . The impact on earnings is greater than 10%. The standard definition of materiality is met. é | Omitting, misstating or obscuring the information would make a difference to the primary users. Boop 3. The Conceptual Framework includes which constraint? . Prudence . Conservatism Cost All of the choices are constraints Boop 4, Which best describes the cost-benefit constraint? a. The benefit of the information must be greater than the cost of providing it. b. Financial information should be free from cost to users. ¢. Cost of providing financial inforthation is not always evident or measurable but must be considered, Alll of the choices are correct,lowing accounting concepts states that — Conon ean be supported by sufficient to allow two or more qualified individuals to t essentially similar conclusion? a. Conservatism ‘b. Objectivity e Periodicity d. Stable monetary unit . Objectivity is assumed to be achieved when a transaction a. Is recorded in a fixed amount of pesos b. Involves the payment or receipt of cash ¢. Involves an arm’s length transaction between two independent parties d. Allocates revenue and expenses in a rational and systematic manner 4. The principle of objectivity includes the concept of a Summarization db. Classific: Co“. + . » 1 of the following relates to both relevance and representation? a. Comparability ‘b. Feedback value _ t. Neutrality _d. Free from error 8. Which of the following situations violates the concept of _ faithful representation? a. Financial statements were issued nine months late. b. Data on segments having the same expected risks are reported to analysts estimating future profit. e. Financial statements included an item of property, plant and equipment with carrying amount increased. to management estimate of market value. d. Management reports to shareholders regularly refer to new projects undertaken. What is the underlying concept governing the GAAP taining to recording gain contingencies? 2) Conservatism‘that users have some knowledge of the complex nomic activities of entities, the accounting process and e technical terminology in the statements. E arers of statements should not try to increase the Pectulices of the information to a few users to the detriment of others who may have opposing interests. 5. In case of conflict between economic substance and legal form of a transaction, the economic substance shall prevail, 6. Small expenditures for tools are expensed immediately, 7. When in doubt, recognize all losses and don't recognize gains. 8. The information should be presented in a manner that facilitates understanding and avoids erroneous implication. 9. It is the capacity of the information to influence a decision. 10. The description and numbers or figures must match what really existed or happened. 1. The financial statements shall be accompanied by notes 0 _ financial statements. 7 3 © ate Do errors or omissions-in the description of the nomenon. ‘ndamental qualitative characteristic is erstandability. o be a faithful representation, an information must be predictive and confirmatory. 6. An enhancing quality: of financial accounting information is comparability. 7. Applying different accounting treatment to similar event _ from period to period is violation of verifiability. 8. The idea of consistency does not mean that entities cannot switch from 6ne accounting method to another. 9. Financial statement users are assumed to have no reasonable knowledge of business and financial accounting matters. 10. Entities consider only quantitative factors in determining whether an item is material. 1i.Neutrality and predictive value are characteristics of _ televant information. e tendency to recognize favorable events early is an le of conservatism. onceptual Framework focuses primari al users of financial eden a